Poter Forces Model

Question 1

Poter Forces Model

Answer 1

Here are the smart notes:

Threat from Substitute Products

• Occurs when customers can easily switch to alternative products.
• Examples:
  
  • Domestic heating systems (gas, oil, electricity)
  • Transport (air, rail, road)
  • Food and drink products (coffee, tea)
• Firms must make their products more attractive than substitutes.
• High threat from substitutes leads to higher competition.

Bargaining Power of Suppliers

• Suppliers have power when they can charge high prices or reduce quality.
• Examples:
  
  • Software companies supplying computer manufacturers (e.g., Microsoft)
• Porter’s conditions for strong supplier bargaining power:
  
  1. Few suppliers
  2. No substitutes
  3. Differentiated products
  4. Important component in end-product
  5. Supplier could easily integrate forward

Bargaining Power of Customers

• Buyers have power when they can demand lower prices or better quality.
• Examples:
  
  • Supermarkets in the UK
• Porter’s conditions for strong buyer bargaining power:
  
  1. High volume purchases
  2. Undifferentiated products
  3. Low switching costs
  4. Significant proportion of buyer’s total costs
  5. Low buyer profits

Competitive Rivalry

• Competition within an industry determines rivalry between competitors.
• Strong competition forces firms to offer low prices and keeps profitability low.
• Porter’s conditions for strong competitor rivalry:
  
  1. Similar-sized competitors
  2. Many competitors
  3. Slow growth in sales demand
  4. Undifferentiated products
  5. High fixed costs